Privatization of Indian Railways: Possibilities and Challenges

Privatization of Indian Railways: Possibilities and Challenges

Chitresh Shrivastva is from Bengaluru, India. He is currently engaged as a Railway Policy Analyst with ThunderBuzz and have so far contributed articles for publications like Harvard Economics Review, South Asian Monitor, Rail Business [FOCUS INDIA] and London School of Economics.

Indian Railways, the fourth largest railway network in the contemporary economy operating 21,000 trains across 1,15,000 kilometres of network managed by the Government of India under the Ministry of Railways for the last 166 years with 14 lakh employees making it the 9thlargest utility employer run as a single management. Over the past 166 years has undergone paradigm shift in the technology and administrative front. The railways initially started as a private entity with eight railway companies entrusted with the responsibility of managing railways and paying 5% of the profits as dividends to the government. Eventually owing to the lack of favorable environment complemented with piling liabilities on the government, brought the private control to an end. The second tenure of the Modi government brings forth the idea of privatization of Indian Railways as the railways continues to grapple with financial turmoil despite an improving operating ratio, yet is far away from achieving an optimal financial position to sustain railway operations, which the government believes can be achieved through privatization of railways with a favorable Return on Investment compensating for operational losses. Let’s try examining the possibility of sectional privatization of Indian railways and the long-term impact of the sectional or selective privatization.

Privatization of Railways in the Contemporary Indian Railway Economy

The railways have been reeling under enormous financial constraints owing to subsidies in the passenger segment amounting to approximately Rs. 38,000 crores with a greater brunt being borne by the suburban services, which resulted the increase in fare by Rs.1.30. The Debroy Committee constituted by the NDA- 1 government recommended privatization of railways, which though at a superficial level is yet to be implemented, has been impressed upon as an economically feasible measure towards unburdening the government of its financial and administrative responsibilities. Yet this is a decision which involves treading with caution and careful examining the potential areas capable of being turned into assets, rather than amounting to as liabilities.

The two sides of Privatization

The decision to privatize railways is a double edged sword which comes with its own benefits and drawbacks when examined from the point of view of accessibility of services to people across walks of life who avail the services of Indian Railways as there is scope for a disproportionate balance of who gets the better half of the services as railways will become a service which will be availed by the people based on their Purchasing Power Parity. What also comes into question is the impact of market forces on the railways and redefining the role of government in adverse situations if the railways under privatization were to suffer a financial withdrawal with increasing variable costs and how would the workforce be determined in a private organization.

Privatization would also involve understanding the motives of the players who would take up the responsibility of railway operation and what sector of railways would they likely focus on or would there be clear distinction between the jurisdiction of powers of the government and the potential players in the core and non – core sectors, both of which are essential to the railways sustenance. We must be reminded of the fact the private players have a greater inclination in operating lines with exorbitant Returns on Investment, which can impact loss making yet strategic lines, most importantly the frontier lines which have strong diplomatic influence. The second point of contention is related to the impact on the service demand especially the premium segment and the cost compatibility. The repercussions of the flexi fare are still being felt across the railways, though to some extent has been subsided due to the ongoing aviation turbulence due to downfall of Jet Airways, the banning of Boeing 737 max aircrafts and increased oil prices resulting in the shift of traffic to some extent from aviation to railways and gradual recovery of the premium segment. This, however, will remain in question under privately run organization if the railways will fall back post commercialisation of operations.

Privatization also brings into question the impact on the employee welfare and benefits which will be regulated as per the goals of the potential player resulting in a setback if the management decisions outcaste the employee interests or in the most adverse situations result in employee lay offs on the pretext of cost cutting and issues of productivity stalling the organization altogether.

The Future of Privatization

Having examined the possibilities and challenges of privatization, it should be noted that the very function of privatization is not to override employee and passenger benefits, but is symbolic of regulation of infrastructure development, with disinvestment in freight segment which would further help concentration of investments in diverse sections of railway operations with the engagement of private players in helping the government supplement its efforts in sustenance of railway operations. The bottom line of the argument is therefore indicative of the need for a complimentary action and not complete substitution, thus creating a win-win situation without compromise on the quality of operations or service and promise of greater output resulting in asset generation and not liabilities.

Sectorial Impact: An Assessment

The idea to privatize the Indian railways has placed the organization at cross roads of what exactly needs to be privatized and the expected output that stands to be achieved. Expert observations point towards a need for improvements in core and non-core segments which have seen shortcomings and miscalculations over decades.

This also brings into question the extent to which the private players would be willing to spend their resources beyond their capability to revive the railways. The hasty privatization of British Railways lacking transparency and accountability, while the private players amend the fare structure without consideration for service quality thus making privatization less than favourable in the Indian context with speculation over the potential of privatization as a tool to overcome operational deficiencies.

This calls for a selective approach to privatization through appropriate assessment of operational feasibility. This would mean examining the infrastructure development, not to be mistaken for PPP, but rather an entity which through independent financial structuring and accumulation of monetary resources through market borrowings and issuing of bonds would help the government spend a greater part of the revenue in improving operations and non – core operations such as retiring rooms and catering services improving the travel experience of the passengers, while the independent infrastructure organization would help in timely delivery and quality infrastructure with greater focus on disinvestment in the freight segment, which would also be beneficial to helping railways rationalize its expenditure and earn greater returns through privatization of freight segment.